EU Resumes Battle Over Imposing Losses at Failing Lenders

Pedestrians walk past the European Union (EU) parliament building and the national flags of the member states in Brussels, Belgium,. Photographer: Jock Fistick/Bloomberg

June 27 (Bloomberg) -- European Union finance ministers
struggled for consensus as they took up an Irish-drafted
compromise proposal for assigning losses at failing banks,
extending a deadlock that doomed talks last week.

The bloc’s 27 finance chiefs remained “quite far away”
from agreement as they convened for the emergency talks in
Brussels at about 6 p.m. yesterday, Sweden’s Anders Borg told
reporters. Ireland’s Michael Noonan, chairing the meeting, held
preliminary talks earlier to get a deal he says is key for
keeping EU crisis-fighting on track.

“We can and even must reach an agreement,” French Finance
Minister Pierre Moscovici said. It’s “indispensable” for
France and Germany to “advance together to find a solution.”

Talks last week foundered on the question of which
creditors face writedowns when banks fail. Some countries, such
as France and Sweden, demanded more flexibility for
national authorities. Others, such as Germany, sought strict
rules across all 27 EU nations. On the table were ways to set
thresholds for losses that would need to be assigned before
national discretion would be allowed.

An updated plan, circulated by Ireland, a week away from
the end of its six-month rotating EU presidency, would hand
regulators different degrees of flexibility depending on how
they plug gaps that arise when some creditors are exempted from
writedowns.

‘Liability Cascade’

“We need a clear liability cascade: first the
shareholders, then the various bondholders, then the depositors
-- not the insured deposits, which have always been excluded by
European law -- then the member state concerned, and if that
member state can’t do it, then also the European rescue fund,”
German Finance Minister Wolfgang Schaeuble said yesterday.

“What we saw in 2008, that the big ones make billions in
profit and the community of taxpayers bears the losses; that’s
something we no longer want to have,” Schaeuble said.

Under the revised Irish plan, regulators would have more
freedom to grant carve-outs from writedowns if the burden is
shifted to other private creditors, rather than to national
resolution funds.

Flexibility could be applied in cases where writedowns
could threaten financial stability, or cause “value destruction
that would leave other creditors worse off,” according to the
proposal, obtained by Bloomberg News.

Levies on Banks

Nations would have to work within certain limits if they
chose to tap resolution funds to make up the shortfalls caused
by exempting some private creditors.

These funds, financed by levies on the banks, couldn’t be
used until 8 percent of the distressed bank’s liabilities had
been wiped out, according to the document. Limits would also be
placed on how much support these funds could provide.

The plan also stipulates that nations can use public money,
including potentially the European Stability Mechanism, to plug
gaps caused by creditor exemptions if the limits on the use of
resolution funds have been reached.

The EU needs an approach “that allows some but limited
flexibility to ensure financial stability, while still providing
an ex-ante pecking order and clear rules,” Joerg Asmussen, a
member of the European Central Bank’s executive board, said in a
speech today in Paris.

“Global investors need certainty about the rules of the
game in Europe,” he said.

Cycle of Contagion

After more than three years of crisis and bailouts in five
euro-area nations, EU leaders have pursued the banking union as
a way to reassure investors that they can break the cycle of
contagion between banks and sovereign debt. The ECB will take
over bank oversight in the euro zone next year, and the strategy
calls for bank resolution procedures to be in place along with
national backstops.

Leaders gathering in Brussels later today may downplay the
pace of banking reforms. Draft conclusions for the summit affirm
that “it is imperative to break the vicious circle between
banks and sovereigns,” without setting deadlines for further
action.

“This is a tough negotiating chapter,” German Chancellor
Angela Merkel said on June 24. Europe’s priority should be to
“become more competitive,” not just increase its oversight of
banks, she said.

Financial Stability

Denmark, one of the few European nations that has allowed
some of its banks to fail, wants strict rules in all 27
countries.

Sweden’s Borg countered that nations, especially those
outside the euro zone, need to be able to step in when financial
stability concerns become paramount.

“I think you should earn flexibility,” he said. “If you
have stronger banks and more money in buffers, then you should
have more flexibility. And also I think we should be able to
take over banks.”

“If we put all the eggs in bail-in, this might be a very
costly solution for Europe,” he said.